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We are completely focused on maintaining customer service levels and managing
costs, while preserving the strength of our balance sheet and generating cash.
What often distinguishes successful companies is their ability to drive towards
a clear strategic vision while maintaining equal focus on superior execution of
near-term operating plans. Backed by a strong and well-trained workforce, these
companies know who they are, where they are headed, and are driven to help
their customers succeed. As a result, these companies tend to dominate the
industries in which they operate. I firmly believe that Finning is such a
company.
At Finning, we are driven to provide unrivalled service to our customers. The
stories about our field technicians and skilled staff are legendary and date
back to our early operating philosophy of “we service what we sell”. In an ever
changing world, it is increasingly important to stand for this level of
commitment and service. It is the combination of the Caterpillar product and
the Finning service that differentiates us in the market place. Investing in
service and our people is of paramount importance in this respect and we
believe our customers will reward us with their loyalty and future business.
It is our intention to dominate the mining, oil sands and heavy construction
equipment businesses in our territories. Further, we believe we can grow our
power systems business substantially. These are the areas where we can leverage
our service capabilities and continue to drive our product support business
forward. We are well on our way towards achieving our target of $2.3 billion of
customer support revenues in 2010.
Finning’s story is about dominating the sales and service of large machines in
Western Canada and Northern Chile. It is a story about a $1 billion book of
business from the oil sands in Canada and our ability to drive the same success
in Northern Chile. It is a story about growing our engines business revenue to
reach $1 billion. And, it is a story about customer service and customer
support. In short, we know who we are and where we are going.
Turning to a review of how we executed our strategic plan in 2008, it is fair to
say that the business environment when the year began was significantly
different than when it ended. In describing our financial results, it is
gratifying to report that 2008 revenues were almost $6.0 billion, up 5.8% from
2007 and a new record. Most notably, our customer support revenues grew by
11.7% over 2007 to $1.9 billion. Annual diluted earnings per share, excluding
certain non-recurring items of $0.06 per share and a non-cash goodwill
impairment charge of $0.88 per share, was $1.49, down 3.9% from 2007. These
were the second best operating results in Finning’s history.
Free cash flow improved significantly. In 2008, we generated $23.2 million free
cash flow, before dividends, a significant improvement over 2007 when we used
$110.7 million. In the fourth quarter alone we generated $151.7 million of free
cash flow, before dividends. Cash flow is expected to improve significantly in
2009. Importantly, we also achieved an attractive return on equity of 15.4% in
2008, adjusted for the goodwill impairment charge and other non-recurring items
noted above. During the year we increased our quarterly dividend to $0.11 per
share, our 7th consecutive year of dividend increases.
Progress by Operation
In Canada, revenues reached $3.2 billion, an increase of 9.6% over 2007, driven
by strong demand for equipment and product support from the existing oil sands
operations. Investment in people to support the oil sands customers, expenses
related to the integration of our new Red Deer facility and fourth quarter
restructuring costs reduced EBIT from the Canadian operations by 18.1% to
$234.5 million. Improving profitability at Finning (Canada) is a key priority
for 2009. We began 2008 pursuing growth, and while we aggressively managed our
capital programs and rental fleets, the capacity additions were greater than
what we needed in a weaker business environment. This is a short-term
phenomenon and we are rebalancing our cost base at Finning (Canada) to align
with expected revenues. We expect the large installed equipment base at the
existing oil sands projects to continue to drive our parts and service business
as well as generate opportunities in heavy equipment overhaul. Additionally, we
believe that planned government infrastructure spending in 2009 and beyond will
support the heavy construction sector.
Our South American operations posted another record year. Driven by strong
growth in our customer support business, revenues increased to $1.5 billion, up
13.3% over 2007. EBIT reached $148.2 million, up 16.3% from 2007. Despite lower
copper prices, the mining sector continued to perform well through the fourth
quarter. Our expense control measures were effective in mitigating inflationary
pressures in the region, and our operating and financial results in South
America continue to be very strong. Our mining customers in South America are
among the world’s lowest cost copper producers, and we believe they will
continue to operate in this environment of lower copper prices. Given
significant expansion in the installed large equipment base over the past few
years, we expect our product support revenues to continue to grow in 2009.
Our UK Group faced very challenging market conditions throughout last year. In
local currency, 2008 UK Group revenues were comparable to 2007 levels. In
Canadian dollars, revenue declined by 9.1% from the prior year. The UK
dealership operations had a successful year in the heavy construction and power
systems divisions. We achieved a 13.1% increase in customer support revenues in
local currency in the U.K., which is particularly notable given the adverse
economic conditions.
We continued to experience challenges with our Hewden business as the U.K.
rental market remained very weak given the difficult economic conditions. Our
actions over the last couple of years have been extensive and we continued to
rationalize and focus the business further with the announced closure of 22
branches and substantially reduced rental fleet investment. As a result of
deteriorating market conditions, we recorded a goodwill impairment charge of
$151.4 million with respect to Hewden in the fourth quarter of 2008. This was a
non-cash charge and reflects the lower value of the business in a significantly
weaker economic environment. The returns from our Hewden operation were
unacceptable and we will take further actions as necessary to improve Hewden’s
performance.
Across our geographies, our consolidated power systems revenues reached a record
$896.9 million, a 9.2% increase over 2007. The engine sales and service
business grew in all our regions and was particularly strong in South America.
The oil & gas sector in Western Canada remained soft; however, electric
power generation and large project work drove considerable activity in the U.K.
In summary, there were many achievements in 2008. Our primary challenge was to
quickly adjust our costs and capacity in Canada and in our rental operations in
the U.K. given the economic downturn. Towards the end of 2008, we initiated in
excess of $100 million of future gross cost reductions and we will continue to
adjust our costs as necessary depending on the economic environment.
Looking Ahead
We are focused on prudently managing our balance sheet through these uncertain
times while positioning the company for future success and growth. Our balance
sheet is solid and we have adequate operating credit facilities that are
committed until late in 2011. In addition, there are no long-term debt
maturities until December 2011. In 2009, we expect to generate significant cash
flow as a result of our focus on working capital management, a further
reduction in rental fleet additions and a very disciplined approach to capital
spending. Our cash will be deployed to reduce debt, pay dividends and
selectively fund long-term strategic initiatives as economic conditions allow.
This financial strength provides the foundation for us to grow and drive
towards our vision.
The tremendous growth in our machine population over recent years has paved the
way for product support opportunities for years to come. We opened our new
Centre of Excellence (COE) in Red Deer, Alberta in the first quarter of 2008.
At the COE, we have centralized activities and implemented more efficient
processes related to preparation of new equipment for delivery and rebuilding
old machines, thus freeing up customer service capacity in our regular
branches. This facility gives us tremendous upside operating leverage as
activity builds in the future.
Northern Chile, we opened a similar facility to serve our mining customers. The
La Negra Truck Shop assembles mining equipment and rebuilds and refurbishes
these machines for second and subsequent lives. In 2009, we will further
increase our presence in this strategic location with a large new Parts
Distribution Centre (PDC) in La Negra. The PDC will support the large machine
population with parts and components and increase efficiencies by consolidating
numerous warehouses in the vicinity.
Our commitment to serving our customers more effectively and running our
operations more efficiently is underscored by our investment in a new
information technology (IT) system. This new IT platform will support all our
business processes. It will allow us to manage the growing volume of
transactions more efficiently and will give us improved access to information
and tools for decision making. The system is being implemented in Canada first
and will subsequently be installed in South America and the U.K.
People
I will close with a final and important message about people. It is our
employees who make Finning the leading equipment and service supplier in our
regions.
Our commitment to maintaining a safe work environment is at the core of our
values. Our ‘lost time frequency rate’, a measure of workplace safety,
continues to improve and we are an industry leader in this area. Avoiding
injuries in each of our operations will remain at the top of our list of
priorities.
Despite this focus on safety, we are deeply saddened by the untimely deaths of
three of our employees during 2008. Such tragedies are unacceptable and the
executive team is absolutely committed to driving our safety values.
Our commitment to our people also extends to continued investments in technical
and leadership training which support our employees’ ability to ensure we
remain our customers’ service provider of choice.
I would like to acknowledge the support of Caterpillar as a strategic business
partner. In my first year as President & Chief Executive Officer, I’m also
appreciative of the support and guidance received from our Board of Directors.
I especially want to take this opportunity to sincerely thank our employees for
their ongoing dedication and hard work. You are the best in the business and it
is a pleasure to work with you every day.
Executing Our Strategy
While recognizing that these are uncertain times, I remain confident that we
are driving the right strategy for our customers, our business and our
shareholders. We have a clear vision to dominate those businesses where we can
truly differentiate our service commitment. We have also taken decisive and
quick action to address our organization’s cost structure and will continue to
be responsive to market conditions.
We have a good line of sight on product support opportunities resulting from the
significant increase in equipment fleets in recent years and we are focused on
executing our strategy while remaining steadfast in our commitment to deliver
the “art of service”.
Sincerely,
FINNING INTERNATIONAL INC.
Mike Waites
President & Chief Executive Officer
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